DBS Vickers initiates coverage of SINOTEL (54 ct) with 88-cent target

Sachin Mittal

Dominates in fast growing Shanxi province. Sinotel is
currently the market leader in Shanxi which is experiencing fast growth in property developments. The Chinese government has been buying out smaller coalmines from private owners for consolidation. As such, there is much cash floating in the market. Property developers have rightly targeted the province, fueling the property boom.

Sinotel's management was in New York recently to meet fund managers. Photo courtesy of Sinotel

More buildings will mean a larger number of wireless network systems to be installed. With Sinotel holding a majority share of Shanxi’s market and its familiarity with the province, the company is likely to win more contracts in the next few years.

We expect Shanxi to contribute over two thirds of revenue in FY09F and FY10F. Deeper penetration versus broader coverage enables above industry operating margins. Sinotel has a presence in about 7 provinces, compared to other players, who have expanded the coverage to 20 plus provinces at the cost of margins. Besides Shanxi, Sinotel is mainly active in the neighbouring provinces of Henan and Jiangsu.

Sinotel’s strategy is to secure
a strong foothold in a province, before venturing into a neighbouring province, in order to save on operating expenses. Sinotel’s operating margins of 29% are above the industry margins of 10-20%, thanks to lower opex as percentage of revenue.

Impressive earnings CAGR of est. 9% over FY09F-11F.
Sinotel should be able to achieve revenue growth of 25% CAGR over FY09F-11F but lower earnings growth of 9% CAGR as

(i) gross margins are expected to deteriorate from
40% in FY09F to 35% in FY11F and

(ii) 7.5% income tax
commences in 2010F as the tax-exempt status expires in 2009.


    Year end Market cap (US$m) Price (30 Nov) PE (09/10) Price/

HK & US listed peers

Comba Dec 08 1,196 8.72 21.3/20.3 4.2 12.4
  Powerwave Dec 08 179 1.35 66.7/14.1 NA NA
  China Grentech Dec 08 92 3.84 12/8.3 0.4 -8.1
  Centron Dec 08 196 2.17 8.7/6.9 1.3 11.8
Average         27.2/12.4    
Singapore SINOTEL Dec 08 120 0.54 5.7/5.5 2.0 33
China listed peers Wuhan Fingu Dec 08 1,506 18.49 26.8/21.7 5.6 18.4
  Sunwave Comm Dec 08 400 20.35 35.4/26.5 4.4 16.3
  Allwin Telecom Dec 08 255 16.28 62.4/50.8 4.6 7.6
China peers’ average         41.5/33.0    
   Source: DBS Vickers, Bloomberg

HK and US listed peers trading at much higher
valuation. Comba, China Grentech and Centron are Sinotel’s direct peers, although bigger in scale. Sinotel’s FY09F-11F earnings growth of 9% is similar to its peers despite higher revenue growth, as Sinotel would start incurring 7.5% income tax in 2010F, after its tax-exempt status expires in 2009F.

Compared to its peers we apply

(i) 15% discount
due to the lower market cap and liquidity of the stock

another 15% discount due to lack of equipment manufacturing business, putting stress on its cash flow.Overall, we apply 30% discount to its sector average of 12.7x FY10F PER. Based on 8.5x FY10F PER, our target price for Sinotel is S$0.88. We recommend BUY for potential upside of over 60%. The stock also looks cheap on FY09FP/B of 1.5x for ROE of 28.9%.

Recent story: 
SINOTEL: What happens next in ADR journey? And when?

AMFRASER Securities initiates coverage of CHINA ANIMAL HEALTHCARE (19 ct) with 28-ct target

Winston Peak

Analyst: Winston Peak

We visited China Animal Healthcare’s (“CAH”) Inner Mongolia plant and metDr Wu Hua. The plant was undergoing GMP certification when we visited and it represents an exciting new avenue of growth for the Company.

We arrive at a FV of 28 SG cents using our earnings model, representing
13.2 and 10.3 times FY09 and FY10 forecasted earnings respectively. The higher valuation than other S-chips takes into consideration the potential high growth from the Biwei Antai and other acquisitions. We forecast the animal HMD vaccine to contribute RMB270m in revenue in the last 3 quarters of FY10, 10% growth in powdered drugs and no growth for injection drugs.

EBITDA margins are expected to fall as the new ventures kick in causing higher expenses, while tax rates will increase gradually to 25% by 2012.With CAH’s strength in the industry and their exciting growth prospects, we believe they are worth a closer look by investors. Moreover, the last traded price stands at a 32% discount to our FV. We therefore recommend to ACCUMULATE amid the general market weakness.

Recent story:
CHINA ANIMAL HEALTHCARE: Vaccine sales to jump next year


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